» 3/19/15 2015-03 Regulatory Roundup: Flex Credit/Cash-in-Lieu Potential Impact on Plan Affordability and New Guidance on Cost- Sharing Limits, Reinsurance, Essential Health Benefits, and More Flex Credits and Cash-in-Lieu of Coverage Potential Impact on Affordability Some groups offer a flex credit to purchase coverage available through a cafeteria plan. For example, the employer offers a flex credit worth $500/month to purchase medical, dental, vision, or contribute to an FSA or 401(k). In some circumstances employees are allowed to cash out all or some of that flex credit as taxable income. This is most common in public sector plans, but also available in some private sector plans. There has been uncertainty about whether a cashable flex credit can be considered an employer contribution for purposes of evaluating a plan s affordability under Pay or Play. The IRS recently issued the final individual mandate regulations, which addressed the use of flex credits and their impact on affordability for purposes of assessing eligibility for a hardship exemption from the individual mandate penalty. Where an employee has employee-only coverage that is affordable, but family coverage that exceeds 8% (now 8.13%) of household income, that family coverage is deemed unaffordable for purposes of the individual mandate and the employee s family can qualify for an individual mandate penalty exemption. The final individual mandate regulations note that for the purposes of determining whether the cost of family coverage exceeds 8.13% of household income, flex credits count as an employer contribution only where (1) there is no cash out option, and (2) the flex credit can be used only toward medical expenses, including a premium for major medical, dental, or vision, or a contribution to a health FSA. There can be no option to cash out the flex credit in any amount or use the credit toward non-medical benefits such as a 401k or dependent care. This flex credit guidance is currently limited to plan affordability for purposes of determining eligibility for the individual mandate penalty exemption, not plan affordability for purposes of the Pay or Play mandate. The IRS has not directly addressed flex credits in the context of plan affordability under Pay or Play. It is likely, however, that the IRS will take the same position on flex credits for purposes of plan affordability under Pay or Play. In that case, employers offering a flex credit that employees can take in taxable income in any amount (or spend on non-medical benefits) will not be able to credit that amount as an employer contribution to the medical plan. Where the flex credit is the employer s only contribution to the medical plan (as is often the case), the employer would effectively have a $0 dollar contribution and their
employees would be deemed to pay the entire employee-only premium, which is almost certain to render the plan unaffordable for at least some employees. Despite a lack of direct guidance, employers with this type of plan design should consider addressing this situation by potentially eliminating the flex credit cash-out option and allowing the employees to purchase only medical benefits with the flex credit. (Employers should limit any contribution to the FSA to $500 annually or two times the amount of the salary reduction contribution to retain its excepted benefits status.) Employers will also want to consider options to make whole those employees who have been accustomed to receiving flex credits in taxable income. If possible, elimination of the flex credit altogether is the preferable approach in the era of health care reform. A similar but separate issue is a plan that offers cash-in-lieu of enrolling in benefits, e.g., the employer contributes $400 to an overall $500 medical premium for those who enroll in the plan, but offers $50 in cash where an individual opts to waive coverage, e.g., if they have coverage through their spouse. This arrangement also has potential affordability implications in that the IRS has commented informally that any amount the individual would receive in cash for waiving the plan has to be added to the employee s cost of coverage. Using the above example where coverage costs $500 per month, the employer contributes $400 and the individual contributes $100, and the individual receives $50 if they waive coverage, the IRS would deem the true employee cost to be $150 instead of $100 because they have to give up $50 in cash to enroll in the plan. Whether this kind of design would render the plan unaffordable depends on a host of factors the original employee-only premium cost, the waiver amount, and the employee s individual household income. Moreover, this is simply informal IRS guidance. Even so, employers with a cash-in-lieu program that seek to ensure an affordable plan might want to reevaluate their cash-in-lieu design. Final Benefit and Payment Parameters Regulations Have Wide Ranging Implications On February 20, 2015, the Centers for Medicare and Medicaid Services (CMS) and the Department of Health and Human Services (HHS) published a final rule titled Notice of Benefit and Payment Parameters for 2016. This set of regulations is several hundred pages long, and addresses a wide range of topics that affect consumers, Exchange operations, and Qualified Health Plans offered through Exchanges. However, it also addresses critical issues for many group health plans, including reinsurance payment amounts and procedures and cost sharing limits. Significant changes also impact Essential Health Benefits Packages and state benchmark plans in the individual and small group markets. Cost-Sharing Limits The Affordable Care Act (ACA) provides that cost-sharing for Essential Health Benefits (EHBs) under a non-grandfathered group health plan cannot exceed certain annual limits. The
regulations set the maximum annual limit on cost-sharing for 2016 at $6,850 for self-only coverage and $13,700 for other than self-only coverage. This is a modest increase from $6,600 and $13,200 for 2015. Notably, these increases are based on the premium adjustment percentage, whereas adjustments to the maximum HDHP out-of-pocket limits for Health Savings Account eligibility are tied to the Consumer Price Index, which is why the two sets of limits no longer match. Another significant issue is that for 2016 plan years there is an embedded out-of-pocket limit for each individual with family coverage. This means that the self-only cost-sharing limits apply to all individuals regardless of whether the individual is covered by a self-only plan or by an other-than-self-only plan. For example, if the out-of-pocket limit on a family plan is $13,700, no individual in the family can incur out-of-pocket costs for EHBs of more than $6,850 (the limit for self-only coverage. This new rule will increase plan costs and require carriers and TPAs to adjust how they administer these limits. We recommend discussing potential implications and cost-saving strategies with your carrier partners or TPAs in advance of the 2016 plan year. Confirmation that Minimum Value Coverage Must Cover Hospitalization These final regulations formally address plans offered without hospital coverage, confirming that group health plans must cover substantial hospitalization and physician services to meet the minimum value requirement. Employees offered these plans can get subsidized coverage through Exchanges if they would otherwise qualify and Applicable Large Employers (ALEs) may be subject to penalties because these plans are not minimum value. There is limited relief for employers with plan years beginning before March 1, 2015 that relied on the minimum value calculator and either entered into a binding written commitment to adopt such a plan or began enrolling employees in such a plan prior to November 4, 2014. These employers will not face penalties until the start of their 2016 plan year. Employers that offered these plans and represented that they were minimum value will need to promptly issue corrected communications. Employers that have adopted these plans, but do not meet the requirements for relief should assess their additional Pay or Play penalty exposure. Exchange Enrollment Opportunities The final regulations address several complex Exchange enrollment opportunities. Exchange enrollment opportunities are relevant for ALEs because a full-time employee s ability to enroll in an Exchange can potentially impact an employer s liabilities for penalties where that employee receives subsidized Exchange coverage. The most significant development for employer plans is the Exchange open enrollment window for 2016, and special enrollment rights for individuals enrolled in non-calendar year plans. The final regulations set the 2016 open enrollment period for all Exchanges as November 1, 2015 through January 31, 2016. CMS originally proposed an open enrollment period from October 1 to December 15, 2015, but reasoned that a later timeline would give insurers additional time to prepare for 2016.
The most notable change in Exchange special enrollment is that individuals enrolled in noncalendar year group health plans can enroll in Exchange plans when that coverage ends. This enrollment right would cover an employee enrolled in a non-calendar year group health plan who wants to enroll in an Exchange plan at the end of their employer s plan year, even if the employee remains eligible for the employer coverage. Coordinating Exchange enrollment opportunities with employer plan years and cafeteria plan election change rules has been challenging. Employees who make a cafeteria plan election to pay for group health plan coverage can make an election change to drop that employer coverage if they can enroll in Exchange coverage either during Exchange open enrollment or pursuant to a special enrolment right if their employer s Cafeteria plan document is amended to allow that change. To allow 2014 and 2015 election changes on these grounds employers must adopt an amendment by the last day of their 2015 cafeteria plan year. Reinsurance The final regulations make several notable changes to the ACA s three year reinsurance program. That program generally requires insurers and self-insured plans that use a third-party administrator (TPA) to make contributions that are used to offset the cost to individual market plans with high-cost enrollees. The final regulations confirm that self-insured expatriate plans and insured expatriate plans are not required to make reinsurance contributions for 2015 and 2016. They also confirm that although reinsurance contributions are not required for plans with an actuarial value below 60 percent, plans discussed above that do not cover hospitalization, but are treated as offering minimum value because they were in place before IRS released Notice 2014-69, are required to pay reinsurance fees for 2015. Reinsurance contributions are based on a plan s average number of covered lives over the first three quarters of the year. Contributing entities must normally submit their enrollment counts for the year no later than November 15. Payments are due on January 15 of the year following the year but contributing entities can also pay in two installments. The total amount due for 2014 was $63 per covered life. It is $44 per covered life for 2015 and $27 per covered life for 2016. Several methods are available to contributing entities for counting covered lives. The final regulations provide additional guidance on the snapshot and snapshot factor methods, which are commonly used by employers. The final regulations specifically address how to prorate counts under these methods when a plan is established, terminated, or changes funding mechanisms in the middle of a quarter. Note that the other permitted counting methods automatically account for partial year enrollment. For the snapshot and snapshot factor methods, if the plan had enrollees on any day during a quarter, the contributing entity must choose a set of counting dates for the 9-month counting period such that the plan has
enrollees on each of the dates. However, the enrollment count for a date during a quarter in which the plan was in existence for only part of the quarter can be reduced by a factor reflecting the amount of time during the quarter that the plan was not in existence (or a payment was not required). The regulations provide the following example of the rule. A plan that terminates on August 31st (62 days into the third quarter) would not be permitted to use September 1st as the date for the third quarter under the snapshot or snapshot factor methods because this would not properly reflect the number of covered lives under the plan in the third quarter of the year. However, it would be entitled to reduce its count of covered lives during that quarter by 30/92, the portion of the quarter during which the plan had no enrollment. This approach is intended to accurately capture the amount of time during the quarter for which major medical coverage was provided to enrollees, while not requiring contributions to be paid more than once for the same covered life. The final regulations also extend a safe harbor for good faith non-compliance with reinsurance data requirements to 2015 but note that HHS will not extend the safe harbor into 2016. Changes Affecting Essential Health Benefits Packages The ACA requires individual and small group insured plans to provide Essential Health Benefit Packages covering the ten EHBs. Significantly, large group insured plans and self-funded plans are not required to cover all EHBs, but EHBs are still important for large group insured and self-funded plans because the ACA imposes lifetime and annual limits and cost-sharing limits to those benefits that are considered EHBs. EHBs include ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care. Since the ACA s enactment there has been confusion as to what is covered within each EHB category. Rather than define EHBs at the federal level, initially CMS provided that each state could define EHBs through the identification of a state benchmark plan. The benchmark plan approach was initially in place only through 2015. However, the final regulations continue the state benchmark plan approach through 2017. State benchmark plans currently in force are based on 2012 plan designs. The 2012 benchmark plans (as may have been adjusted to provide coverage for all 10 EHB categories) will remain in effect through 2016. States may choose new benchmark plan for 2017 based on 2014 plan designs. Large group insured plans and self-funded plans are deemed to have used a permissible definition of EHBs if they define EHBs based on the selection of any state benchmark plan. As such, the EHB developments for the small group and individual markets are relevant for large group insured plans and self-funded plans. CMS continues to issue guidance on permissible
and impermissible practices with respect to EHBs in the individual and small group insurance markets. Self-funded plans should evaluate any resulting changes to benchmark plans that will apply in 2017 based on 2014 plan designs because these changes may impact how insurance carriers and TPAs design and administer plans in the large group market. Compliance Alert is presented by the Compliance Practice Group of Alliant Employee Benefits CA License No. 0C36861 2015 Alliant Employee Benefits, a division of Alliant Insurance Services, Inc. All rights reserved.